The Future of Embedded Finance Is Bank-Led, and it Starts Now

GUEST POST by Trent Sorbe (Chief Payments Officer, First International Bank & Trust)

The early vulnerabilities in banking-as-a-service (BaaS) models have created a moment of reckoning in embedded finance. What once enabled rapid launches and flashy growth has become a liability. Fragmented architecture, unclear compliance responsibility and brittle operational controls are no longer acceptable to regulators, to customers or to the financial system.

As demand for embedded finance outpaces the capabilities of legacy models, direct, transparent partnerships between banks and fintechs are forming the backbone of innovation. The next generation of BaaS – what we call BaaS 2.0 – isn’t just about launching quickly. It’s about building smarter, with banks and fintechs in direct partnership to deliver innovation with integrity.

What Went Wrong?

The first wave of BaaS was built for speed. Middleware providers emerged to abstract away bank systems, offer plug-and-play functionality and help fintechs quickly deploy financial features. But speed came at a cost.

These layered models often created ambiguity around who owned what: Who held the ledger? Who controlled compliance? Who bore regulatory risk? As fintechs scaled, regulators rightly began asking tough questions. The market needed more than just fast integrations -- it needed operational accountability and regulatory integrity.

This model simply doesn’t scale. As the stakes grow higher (with more customers, more transactions and more scrutiny), the weaknesses of middleware-heavy structures are harder to ignore. Complexity obscures responsibility. Innovation outpaces governance. And in the worst cases, customer trust is the first casualty.

BaaS 2.0: A Blueprint for Sustainable Growth

BaaS 2.0 marks a decisive shift away from fragmented, middleware-heavy approaches toward bank-led embedded finance partnerships that emphasize compliance, operational resilience and scalable growth. This paradigm allows banks to reclaim their central role – not as bottlenecks, but as trusted partners. Fintechs, in turn, bring the agility and customer-centricity that drive market growth.

Think of the bank as the "motherboard" of the ecosystem – owning the ledger, controlling the operational switch, and providing direct, secure access to fintech partners. This streamlines the tech stack and consolidates legal and compliance responsibilities, ensuring that innovation is built on a stable and regulated platform.

This shift isn’t just theoretical. Organizations leveraging BaaS are growing at two to three times the rate of traditional banks, with embedded finance expected to generate up to $148 billion in annual revenue by 2025.

A Better Model for Banks and Fintechs

The advantages of direct bank-fintech relationships are clear and mutual.

Banks retain oversight of the customer experience, regulatory posture and technology delivery. They aren’t exposed to the blind spots that come with multiple layers of middleware. This control enables them to proactively manage risk and meet regulators’ expectations head-on.

Fintechs, meanwhile, get to build with confidence. They no longer have to navigate inconsistent API standards, overlapping contracts or unclear compliance processes. A single, trusted partnership with a bank accelerates time to market, reduces technical friction and ensures every product they launch is aligned with regulatory frameworks.

What results is not just faster launches, but smarter, more durable growth. This is a model where both parties share in the upside and where each side brings complementary strengths: banks provide infrastructure and governance; fintechs bring agility and customer-first innovation.

The Regulatory Landscape: Pressure That Sharpens Focus

Yes, regulatory pressure is rising. But for direct bank-fintech partnerships, it’s not a burden. It’s a competitive advantage. Instead of piecing together compliance from middleware providers, fintechs can lean on the experience and oversight of a federally regulated institution. This doesn’t just help with audits or exams – it builds trust with users, partners and investors who want assurance that the product they’re using is both innovative and safe. The shift allows banks to meet its fintech partners where they’re going without compromising on control, security or reputation.

Technology is Becoming Cloud-Native and API-First

A defining feature of forward-thinking banks is the adoption of modern, cloud-native, API-first platforms. These technologies allow banks to offer flexible, scalable services that fintechs can easily integrate into their own products. By moving away from legacy core systems and embracing agile infrastructure, banks can deliver the speed and customization fintechs need, without sacrificing control or operational integrity.

Looking at Kavinu as an example, the platform is built for direct bank-fintech collaboration, enabling fintech partners to access payment rails, digital banking features and compliance tools through a single, secure interface. This not only accelerates time to market but also ensures every transaction is backed by the operational rigor and regulatory standards of a federally regulated bank.

This kind of infrastructure reflects the broader maturity of embedded finance. We’re no longer in the experimental phase. The market demands industrial-strength tools built for direct collaboration between banks and fintechs – not mediated by layers of translation.

What’s Next for Embedded Finance?

As embedded finance matures, it is reshaping how consumers and businesses engage with money. The future will not be about standalone financial apps. It will be about contextual finance, where payments, credit, savings and other services are deeply woven into everyday digital experiences.

In this new landscape, the most successful solutions will be those that combine front-end innovation with back-end integrity. The bank will not disappear into the background; rather, it will act as a stabilizing force enabling personalized, real-time services while maintaining the trust of the financial system.

The most successful embedded finance solutions will be those where the bank leads the charge. This approach allows fintechs to focus on delivering exceptional user experiences, while banks provide the sound, secure and compliant foundation that underpins every transaction.

Several trends will define this next chapter. First, embedded services will become more seamlessly integrated into digital ecosystems – from marketplaces and payroll platforms to B2B software and gig economy tools. Second, personalization will evolve from a feature to an expectation. Consumers will demand financial experiences that reflect their unique needs, and regulators will demand that personalization still complies with fair lending and data protection laws.

Third, resilience will become a non-negotiable. In a world of cyber threats, market volatility and rising expectations, embedded finance platforms must be able to adapt quickly and maintain continuity. And finally, innovation will scale. Direct bank-fintech partnerships will unlock access to underserved markets, power new business models, and extend financial tools to users previously left behind.

Leading with Intention, Building with Trust

The shift to direct, bank-led embedded finance is not just about solving today’s problems. It’s about building tomorrow’s financial infrastructure to be scalable, resilient and inclusive.

For banks, this is an invitation to step into a leadership role. By modernizing infrastructure and engaging with fintechs through secure, compliant platforms, banks can remain relevant and competitive in a rapidly digitizing world. For fintechs, it’s a call to build with discipline and with the confidence that comes from partnering with institutions that know how to navigate complexity and protect consumers.

The result is a framework that amplifies both innovation and responsibility, creating the conditions for sustainable growth. By moving beyond middleware complexity and embracing BaaS 2.0, banks and fintechs can build a financial future that is innovative and built to last.

The infrastructure is ready, the technology is proven, and the market demand is strong. Successful growth belongs to those who act decisively on this foundation.

About the Author  

Trent Sorbe is the Chief Payments Officer at North Dakota-based First International Bank & Trust. Sorbe leads the $5.5 billion organization’s payments initiatives, including its Kotapay division, a top-40 ACH originator that settled over $103 billion in ACH originations in 2024.  Under Sorbe’s leadership, Kotapay is leveraging its scale and technologies to expand into additional payment verticals. In 2024, the organization announced the launch of Kavinu™, one of the few bank-direct embedded payments technology platforms.    

A 30+ year banking and payments veteran, Sorbe has held leadership and board positions at nationwide payment card issuers and was a senior examiner at the FDIC. He founded a successful fintech accelerator and podcast, and regularly authors articles on payments and banking. He also currently serves on the boards of three early-stage startup financial technology companies and is an advisor to a number of fintech founders.